A wide range of consumer stocks have enjoyed very strong runs in the market, and alcoholic beverage companies like Diageo (NYSE:DEO), Anheuser-Busch InBev (NYSE:BUD), and SABMiller (Nasdaq:SBMRY) have been among the strongest performers. Valuations are starting to look pretty overheated, even allowing for improving global consumer incomes, easing input costs, low rates, and so on. Even so, investors looking for relatively liquid plays on the ongoing growth of emerging economies may want to consider SABMiller for its broad exposure to markets like Africa, Latin America, and China.
SEE: An Evaluation Of Emerging Markets
Bringing The Year To A Respectable Close
Unfortunately, SABMiller is not atypical among non-U.S. companies in eschewing the quarterly reporting format that American investors typically expect. Even so, the company's full-year results came in broadly as expected, particularly given the company's update on revenues and volumes back in April.
Revenue rose 10% for the full fiscal year at the group level, or 7% on an organic basis. Likewise, revenue on an “ex-associates” basis (excluding joint ventures and so on) rose 7% and just slightly (2%) missed the average sell-side estimate. Organic growth was very strong in Africa (up 18%), while South Africa (up 8%) and Latin America (up 7%) were both respectable. Growth in Europe (up 5%), North America (up 2%), and Asia-Pacific (up 3%) was less impressive, particularly the latter two numbers. Importantly, organic growth was relatively balanced between volume, mix, and price, as organic lager volume increased 3%.
Profits were also solid. SABMiller does not provide a typical full income statement, but the margin data provided was nevertheless positive. EBITDA rose 9% on an organic basis (up 14% as reported), more or less matching expectations. Growth here largely tracked revenue, with Africa up 20%, Latin America up 11%, and South Africa up 10%. Adjusted operating income was likewise solid, up 10% for the year.
SEE: Zooming In On Net Operating Income
Developed Markets Still Weak
One of the consistent themes in the beer world is that the volumes for the major brewers in North America and Europe are pretty miserable. SABMiller saw just 2% revenue growth for fiscal 2013 in North America and 5% for Europe, and rivals like Anheuser-Busch InBev, Heineken (OTC:HEINY), Carlsberg (OTC:CABGY), and Molson Coors (NYSE:TAP) have all had meaningful struggles as well.
The results at MillerCoors, the venture between SABMiller and Molson Coors to distribute and market the two companies' alcoholic beverages in the U.S. are consistent with this theme. Volumes were down about 3%, with Miller Lite down in the high single digits and Coors Lite down by the low single digits.
A variety of factors have been blamed for this industry-wide problem. While the weather excuse is getting a little tired, persistently unimpressive employment and wage data highlights some of the economic pressures. What's more, it looks like craft and microbrews are taking a toll – Boston Beer (NYSE:SAM) recently reported double-digit volume growth and MillerCoors' own “Tenth and Blake” craft beer segment saw high single digit volume growth (and helped push overall revenue per barrel up 4%).
SEE: Beeronomics – Factors Affecting Your Pint
But Emerging Markets Are The Real Opportunity
The good news for SABMiller is that North America and Europe combine to account for only about one-quarter of company EBITDA. It is very much the case, then, that SABMiller is an emerging market company. Latin America contributes about one-third of the company's profits, and while SABMiller has struggled to compete with BUD in markets like Brazil and Mexico, BUD has likewise had trouble competing with SABMiller in Colombia and Peru.
Africa and Asia are even bigger opportunities for this company long-term. SABMiller has commanding share (80% or higher) in many African countries, but consumption is still low. The average South African drinks almost eight times more beer than the average African. Given that affordability is an issue (beer is about four times more expensive in the whole of Africa relative to South Africa on an hourly wage basis), SABMiller has been expanding its offerings of more affordable products, as well as local crop beers (made from sorghum or cassava instead of barley, for instance).
It's worth remembering that emerging market exposure doesn't guarantee short-term success. SABMiller's partner in Russia (Efes) had very weak results recently, and although SABMiller is tied to some of the strongest brands in China (most notably Snow, through its partnership with China Resources Enterprises), they're not immune to economic conditions and customers trading down.
SEE: Don’t Ignore These Emerging Markets
The Bottom Line
SABMiller is the sort of company that I might very well be happy to own for decades. While there are periodic rumors of BUD making a bid (the companies really only notably overlap in the U.S. and China, so antitrust issues are likely manageable), I think it's more likely that SABMiller chooses to stay independent and act as a consolidator in its own right (perhaps acquiring partners like Efes or Castel).
Unfortunately, today's price is not compelling for new investors. Even if the company can grow its revenue at a mid-to-high single digit rate and improve margins through better asset leverage such that free cash flow (FCF) grows at a low double-digit rate, it's hard to get a price target into the $50s (where the stock currently trades). While I'm comfortable holding the temporarily overpriced shares of a high quality company, newcomers may want to wait for this bull market in consumer stocks to fade before buying in with their own money.
At the time of writing, Stephen D. Simpson owned shares of SABMiller.
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